MUMBAI: The Reserve Bank is in talks with the Finance Ministry for launching inflation-indexed bonds, which can help reduce physical demand for gold, Deputy Governor H R Khan said here today.

The move can also help balance trade imbalances as gold import has been jacking up trade deficit which in turn increases current account deficit.

"We are talking to the Finance Ministry to launch inflation-linked bonds, which can help reduce the demand for physical gold," Khan told the Ficci-organised Asian Financial Cooperation Conference here.

The move can also help arrest imported inflation in the light of the steep fall in the rupee. Typically, according to experts, a 10 percent fall in the rupee leads to a 100 basis points or 1 percentage point spike in inflation.

The rupee has lost nearly 7 percent this fiscal after losing nearly 18 percent in the last calender year.

It can be noted that last year the country imported 969 tonne gold, which contributed to record current account deficit of 4.2 percent.

This year, however, there is some taming in gold import demand and according to the World Gold Council, this is likely to slide to 800 tonnes, thus losing the years of gold-demand dominance to China by a whisker this year.

Both the RBI and the government have been taking steps to reduce gold demand through a series of measures.

As gold imports touched a record high last year, pushing up the current account deficit to a historic high of 4.2 percent in the year, the Reserve Bank has unveiled a slew of curbs on gold purchase and financing.

This spike in gold demand was in spite of the record price rally that metal witnessed last fiscal.